Is This A Good Time To Buy Brazilian Land?

Sep 01, 2006

It depends on how fast you expect to recover your investment, the type of land you want to buy and how much endurance you have.

In the past three or four years, many Americans have moved to the state of Bahia, where land was cheap and overall conditions were more than adequate. But American farmers who purchased that land two years ago now face the same conditions as their Brazilian neighbors, so anyone purchasing a farm today needs to do so with their eyes open.

FARMING WITHOUT A NET

Investors buying virgin land today may potentially face several years of investment in soil development, and be able to fund that with their U.S. dollars. Two years of operational loses were the norm for converting virgin soils when soybean prices were significantly higher — low prices will only stretch those initial losses out for an additional year or more. And operating credit in Brazil is very tight.

Brazil offers farming without a net; there are no Loan Deficiency Payments to prop up sub-$4 beans. Most farmers there are at or below breakeven.

THE EFFECT OF THE EXCHANGE

Although future weakness in the real versus the dollar creates higher soybean prices, and eventually higher land values in Brazil, it also reduces the dollars paid for the farmland when you sell it.

An investment made today at a rate of 2.2 reals to the dollar would depreciate by nearly 25% if the exchange rate reverts to nearly 3 reals to the dollar.

TIMING IS EVERYTHING

There will likely be a sweet spot when the exchange rate improves, but before land prices increase. But because everything takes time in Brazil, that means you must do your homework now to cash in on that sweet spot. Economists predict that the exchange may improve slightly towards late 2006.

WHO IS BUYING NOW?

Three categories of corporations are paying cash now for Brazilian land:

Large paper companies are buying vast expanses for reforesting projects. Eucalyptus grows much more quickly in Brazil, and these companies can profit from both timber sales and carbon credits under the Kyoto Protocol guidelines. Our contacts in Rio Grande do Sul and Mato Grosso report these companies are buying without haggling over price.

Soybean processors are buying land in the Center-West region, especially in Goiás, in order to integrate their planting, crushing and biodiesel production systems.

Sugarcane mills are purchasing or leasing all the farmland possible within 25 miles of their sugar and ethanol plants.

THE MIRE OF BRAZILIAN FARMING

The problems bogging down Brazil's farmers are many:

The worst market prices in many years

An unfavorable exchange rate

Dry spells and/or continuous rainfall — at the wrong times

Attacks of Asian rust beginning earlier than usual in many regions, and well before farmers could begin their preventative spraying

Below-average yields and grain quality

A surge in the number of outbreaks of foot-and-mouth disease, which led to a long-lasting ban on Brazilian beef by more than 50 countries

Input costs rising faster than the rate of inflation

The usual outrageous truck-freight rates in the Center-West because of a decaying highway system and rising fuel costs

Little help from the Brazilian federal government

DEBT DISTRESS

Many Brazilian farmers are unable to repay their loans. In the state of Mato Grosso alone, more than 850 combines were returned by bean producers, declaring their inability to pay.

This is also a presidential election year in Brazil. President Luiz Lula da Silva and his Workers Party love to see food prices at 10-year lows. The only exceptions are sugarcane and coffee.

CHEAPER ACRES

The real estate market can best be described as “dead” right now. Traditionally, land prices are quoted on a sacks-per-hectare basis (1 sac = 132 lbs., or approximately 2.2 U.S. bu. and 1 hectare = 2.47 acres).

The chart below looks at the southern state of Paraná, with its well-developed soils and infrastructure and a relatively short haul to the ports — you can see how farmland prices have been affected over the past two seasons.

Virgin soils and/or degraded pastures in “newer” areas such as Mato Grosso, Bahia or Tocantins may be priced at half, or even a third of the above values. In some cases, however, prices for land in these areas are holding stronger, in part due to:

A more diversified revenue stream (ie., cattle) and less reliance on soy prices

Less operational debt than what is typically incurred with intensive row crop production

Land prices have dropped as a result of Brazilian agriculture's economic crisis.

TOUGH TIMES

After spraying his soybean fields for the third time against rust, Minas Gerais farmer Olavo Borges gave up. He and his brother sold one of their two pickups to pay the fungicide supplier, but could not find a buyer for their combine.

By March 2006, a sugar mill began offering five-year land lease contracts to plant sugarcane. Many of Borges' neighbors literally ran to the plant to sign the contracts, as the price at least offered some net profits. For five years, these farmers will collect the lease payment, helping them to recover from two bad seasons that have left most producers cashless and heavily indebted.

NEW MARKETS

When Borges planted last October, he had just a single market for his beans — the group that Brazilians call ABC — ADM, Bunge and Cargill. While producers in Goiás sell mostly to local crushers, farmers in most other states have to rely on the ABC companies or the local Maggi Group to market their beans. But with the increased soybean demand for biodiesel production, and with the very recent launch of the H-BIO program, producers are finally beginning to visualize a brighter future.

NEW FUEL

Called H-BIO, this new diesel was developed, tested and approved for production by Petrobras, the giant company that controls fuel markets in Brazil. With the addition of 10% hydrogenated soybean oil to diesel, the new product contains much less sulfur, but still offers the same performance levels, and may create new markets, more demand and higher prices for Brazilian soybean producers.

SMOOTHER SAILING AHEAD

It's a tough time to be a Brazilian farmer. However, with the world looking to farmer for their daily meals and to fill their fuel tanks, it will only be a matter of time before the farmers of Brazil are navigating to more profitable times.

HAS THE DOLLAR BOTTOMED?

Most economists don't know the answer to this, surprised that the dollar has made a strong comeback, getting close to the 2.30-real level in late May. This is good news after staying below 2.10 reals for a long while. And it is good news both for Brazilian bean producers and for Americans looking to buy Brazilian land.

BIO-SOLUTION?

The new diesel-plus-hydrogenated soy oil recently launched by local giant Petrobras, dubbed H-BIO, reportedly reduces diesel sulfur contents to less than 10% of that in regular diesel. But a few skeptics see the new product as a limited and “localized solution” because of logistics. As almost all Brazilian diesel is produced in the Southeast states, freight makes it expensive to ship the H-BIO to the North, Northeast and Center-West.

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